Kier boss Paul Sheffield has warned of an industry backlash against public sector pressure on contracts and payment, while also confirming there will be some “regrettable people cost” as the firm consolidates offices.
The Kier chief executive said contractors are currently faced with “teams of consultants crawling over applications for payment” as they try to recover costs on jobs.
He was speaking after Kier posted half-year results showing a 24 per cent fall in construction profits this morning, with margins at 2.1 per cent, and highlighting pressures on cash and payment.
The firm is also undertaking a £12 million restructure of its construction business, which Mr Sheffield said would see some office consolidation and job cuts, but would not compromise their regional approach.
The chief executive said he absolutely supports prompt payment for the supply chain, but said project bank accounts, where tier two contractors are paid directly by the client, are “beginning to become a reality” and are one of a number of pressures on contractors’ cash balances.
He said: “How long before the industry suddenly turns around and says: ‘If I can’t generate cash to use on other things, then why on earth would I want to work for 1 per cent?’”
But he added: “I think it will take a while for that conversation to take hold.”
Mr Sheffield said Procure 21+ for the Department of Health is an example where Kier is expected to pay the supply chain within days of receiving money from the DH, while a lot of infrastructure projects make similar demands under target cost contracts.
He said there are challenges in recovering payment from public sector clients, which under government rules are supposed to pay within 30 days.
“At the end of the month it’s quite difficult to assess what’s been done and what should be paid for. The other dynamic is that there are teams of consultants crawling over applications for payments at the moment dictating how much is paid to contractors at the end of the month.”
He said that means a job bid for £1m may well be paid on the 28th day, but payment would be nearer £800,000.
Mr Sheffield said it would not be right to comment on details of his company’s restructure, which has already cost £4.4m this year, until it has been carried out.
“It’s something we have to do, it’s very sensitive and I’m not going to trawl the details of it through the press.
“What I will say is the building side of our business has been facing really tough trading conditions for a couple of years, the amount of building work we are doing is down 30 per cent on three years ago, so we need to make sure we are being efficient and effective in everything we do.”
Mr Sheffield said the firm is very focused on “not withdrawing from our regional structure”.
“We have always said that there’s a very fine balance between having a central structure and very efficient and effective regional network, and I don’t believe it will be in the long-term interests of our business to withdraw from the regions.”
Mr Sheffield said Kier has 35 offices serving construction and up to 30 more for the FM and maintenance business.
“What you have got, in some circumstances, is some of those offices are reasonably close together.
“There’s a lot of logic and sense in combining a couple of business units under one roof and saving office space. Unfortunately, there will be some people cost that goes with that, and that’s very regrettable.”
Kier has already shut down its scaffolding business. Mr Sheffield said the business is more focused on the constructing rather than servicing construction.
“Scaffolding was a great place to be a couple of years ago, but not a great place to be a subcontractor at the moment.”
Asked if the restructure could lead to more centralised supply chain management, Mr Sheffield said he sees “local delivery for local projects as still a very efficient and effective way of delivering”.
He said there would be circumstances, however, where national suppliers could be the best option.
Mr Sheffield also said contractors that push out payment terms are “going the wrong way” and are “damaging the industry”.
He said the firm has “always known that margins will slip from the all time high we have see in the last few years”.
Total group revenue fell 7 per cent on the same period in 2011 to £976m and underlying profit before tax decreased by 21 per cent to £27m.
Mr Sheffield said he is “pretty satisfied” with the fundamental performance of the company, with “no surprises” due to market conditions.
He added that Kier will continue to focus on growth areas, such as infrastructure and energy, while delivering its plan to expand internationally in the Middle East, Carribbean and Hong Kong.
The share price was down 4 per cent today.
Government playing “risky game of poker” with EDF
Kier chief executive Paul Sheffield has also reignited his call for the government to reach an agreement with EDF before the power giant “walks away” from the UK.
Kier won a £130m contract for earthworks on the Hinkley Point C nuclear site, but it cannot be any more specific on a start date than “later in the year”.
“I think it’s a very risky game of poker they [government] are playing with EDF at the moment,” he said.
“I think they’re in grave danger that, if they don’t strike a deal with EDF, EDF could walk away.”
But he said Kier would be ready if that does happens, saying the consequence could be a “real dash for gas” which would “fit in to our plans”.